Africa is not immune to the ‘all-asset’ sell-off that markets are experiencing but when the dust settles investors may find good opportunities on the continent says Martin Richardson, CEO of Rand Merchant Bank, RMB in London.
“Currently we are seeing a rare, synchronised sell-off of all assets. Typically during periods of extreme volatility, we would see stocks fall but bonds rally as investors seek safe-haven assets. But now all assets are selling – from stocks to bonds and even hard assets like property and gold.
“The easy money printing excesses of the past years are unwinding as investors are now once again more sober and stringent in assessing assets’ true value.”
Richardson added that as the world faces a global recession, some African sovereigns may have to restructure their debt.
“Africa’s hard currency bond markets are effectively closed at the moment and limited funds are being raised internationally. However, when the markets do re-open they will be offering materially higher yields and potentially better returns for investors.”
The perfect storm of inflationary pressures, and aggressive monetary tightening from central banks, combined with a deepening of the Russia/Ukraine crisis, has made capital raising via traditional bond markets particularly expensive for African countries whose governments have been forced to find innovative ways to raise capital.
He added that the one fortunate current dynamic is that African Eurobond maturities over the next few years are relatively manageable and is a sign of market maturity as borrowers have actively managed their liability profiles.
“As African debt markets reopen, hopefully in 2023, we may see an incremental shift to less liquid private debt investments into African companies. This will be an opportunity for some investors as there are African companies which will be relatively unaffected by a potential global downturn.
“It is likely that a global recession will trigger a material local currency depreciation in specific African countries, however, this is also worth monitoring as it may provide interesting opportunities, as currency markets often overshoot fundamentals.”
Richardson added that there are a number of international government agencies who are willing to support the African continent during the tough times that lie ahead and that we should expect more structured transactions which assist in reducing certain credit and market risks.
“Once equity markets stabilise over the medium term, we may observe a resurrection globally of convertible bonds which helps keep the debt more affordable by keeping the coupon interest rate low. But in Africa, unfortunately, there are only a few large corporates with sufficiently liquid equity markets to support a convertible bond issuance, mostly in South Africa.
Convertible bonds are a type of debt security that provides investors with a right to exchange the bond for a predetermined number of shares in the issuing company at certain times of a bond’s lifetime.
The interest rate is typically lower because of the potential to convert debt to equity at favourable terms.
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